Professional Documents
Culture Documents
Andreea CHIRITESCU
Eastern Illinois University
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24
Measuring the Cost of Living
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1
The Consumer Price Index
• Consumer price index (CPI)
– Measure of the overall level of prices
– Measure of the overall cost of goods and
services
– Bought by a typical consumer
– Bureau of Labor Statistics
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Calculating CPI
1. Fix the basket
– Which prices are most important to the
typical consumer
– Different weight
2. Find the prices
– At each point in time
3. Compute the basket’s cost
– Same basket of goods
– Isolate the effects of price changes
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2
Calculating CPI
4. Chose a base year and compute the CPI
– Base year = benchmark
• Price of basket of goods and services in
current year
• Divided by price of basket in base year
• Times 100
5. Compute the inflation rate
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100
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Table 1
•Calculating the Consumer Price Index and the Inflation
Rate: An Example
•This table shows how to calculate the consumer price index and the inflation rate for a
hypothetical economy in which consumers buy only hot dogs and hamburgers.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
3
Table 1
•Calculating the Consumer Price Index and the Inflation
Rate: An Example
•This table shows how to calculate the consumer price index and the inflation rate for a
hypothetical economy in which consumers buy only hot dogs and hamburgers.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as •7
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 8
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
4
Figure 1
•The Typical Basket of Goods and Services
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
5
GDP deflator versus CPI
• GDP deflator
– Ratio of nominal GDP to real
GDP
– Reflects prices of all goods &
services produced
domestically
“The price may
• CPI seem a little high,
– Reflects prices of goods & but you have to
remember that’s in
services bought by today’s dollars.”
consumers
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6
Figure 2
•Two Measures of Inflation
•This figure shows the inflation rate—the percentage change in the level of prices— as
measured by the GDP deflator and the consumer price index using annual data since 1965.
Notice that the two measures of inflation generally move together.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7
Real and Nominal Interest Rates
• Nominal interest rate
– Interest rate as usually reported
– Without a correction for the effects of
inflation
• Real interest rate
– Interest rate corrected for the effects of
inflation
= Nominal interest rate – Inflation rate
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
8
Figure 3
•Real and Nominal Interest Rates
•This figure shows nominal and real interest rates using annual data since 1965. The nominal
interest rate is the rate on a 3-month Treasury bill. The real interest rate is the nominal interest
rate minus the inflation rate as measured by the consumer price index. Notice that nominal and
real interest rates often do not move together.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.